COURT FILE NO.: CV-17-587800

DATE: 20180522

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

FRANCO NOTTE

Plaintiff

– and –

TELOIP INC.

Defendant

Joseph Figliomeni, for the Plaintiff, Franco Notte

Deborah E. Palter and Sapna Thakker, for the Defendant TELoIP Inc.

HEARD: April 16, 2018

REASONS FOR DECISION

SANFILIPPO, J.

A. Overview

[1] The plaintiff, Frank Notte, seeks summary judgment in the amount of $195,000 plus accrued and unpaid interest for repayment of loans that Mr. Notte alleges to have advanced to TELoIP Inc. (“TELoIP”). Mr. Notte does not seek, in either his Statement of Claim or in his Notice of Motion, a determination of the priority that any such judgment would have relative to the secured and unsecured debt obligations of TELoIP.

[2] TELoIP defended initially by denying the existence of any such loans, pleading that the money was not advanced or if advanced was repaid in cash or by transfer of shares. TELoIP amended its statement of defence to plead that Mr. Notte contractually agreed to subordinate or postpone his unsecured loans until payment by TELoIP of secured indebtedness owed by TELoIP to all investors who have advanced funds pursuant to certain secured debentures. This position is based on the terms of a Proceeds Sharing and Priorities Agreement entered into by Mr. Notte with TELoIP and TELoIP’s other investors. Mr. Notte denies that this agreement has any bearing on his claim or motion for judgment.

[3] For Mr. Notte to succeed on this motion he has the burden of establishing, on a balance of probabilities, that there is no genuine issue requiring trial concerning the two issues that arise from TELoIP’s defence: namely, that he loaned TELoIP the sum of $195,000 that has not been repaid, and; that he is not contractually prevented by the terms of the Proceeds Sharing and Priorities Agreement from seeking judgment on his loans.

[4] On the basis of the reasons set out herein, I have determined that there is no genuine issue requiring trial that Mr. Notte advanced unsecured loans to TELoIP in amounts totaling $195,000 and that TELoIP has defaulted in repayment of these loans upon demand. TELoIP concedes that it has not repaid Mr. Notte in cash for the amounts said to be due and has not produced evidence to rebut Mr. Notte’s testimony that he was not repaid through transfer of equity.

[5] I also find that there is no genuine issue requiring trial that the Proceeds Sharing and Priorities Agreement does not prevent Mr. Notte from seeking judgment on his unsecured loans. In so concluding, however, I make no determination regarding the priority of Mr. Notte’s judgment relative to the secured and unsecured debt obligations of TELoIP as no such finding was sought or required by this summary judgment motion.

[6] Mr. Notte is awarded judgment against TELoIP in the amount of $195,000 and accrued and unpaid interest thereon at the rate of 20% from the date of default, October 31, 2017, to the date of judgment, and post-judgment interest in accordance with the rate set out in the Courts of Justice Act, R.S.O. 1990, c. C.43.

B. Issues

[7] Mr. Notte pleads succinctly in his 10 paragraph statement of claim for recovery of unsecured loans totaling $195,000, said by Mr. Notte to have been advanced to TELoIP on two occasions: $95,000 on or about February 23, 2007 and $100,000 on or about December 13, 2008 (collectively the “Notte Loans”). Mr. Notte pleads that TELoIP paid interest on the Notte Loans each month for over ten years from February 2007 until October 2017, at which time payments ceased and a demand for payment was made by Mr. Notte. As TELoIP has not repaid the loans, Mr. Notte advanced this action and now seeks summary judgment.

[8] TELoIP’s statement of defence, dated January 8, 2018, pleads that TELoIP did not enter into any loans with Mr. Notte, that the ten years of monthly payments were made in error and do not represent an admission on the validity of any loans, and that TELoIP is thereby not liable to Mr. Notte for the amounts claimed.

[9] On April 11, 2018, TELoIP was granted leave to amend its statement of defence to plead that TELoIP and TELoIP investors, including Mr. Notte, entered into a Proceeds Sharing and Priorities Agreement dated July 24, 2017 (“Priorities Agreement”) that is said by TELoIP to govern payment of obligations owed to its investors, including Mr. Notte. TELoIP contends that under the terms of the Priorities Agreement, Mr. Notte is not entitled to judgment until after payment of all indebtedness to all secured investors, which has not yet occurred. Mr. Notte denies that the Priorities Agreement was intended to pertain to his unsecured loans, at all.

[10] This summary judgment motion raises two genuine issues:

a) Did Mr. Notte loan TELoIP the sum of $195,000 that is due and payable?

b) If so, does the Priorities Agreement prevent Mr. Notte from seeking judgment?

[11] To succeed on this motion for summary judgment, Mr. Notte must establish that the two genuine issues do not require a trial for determination.

C. Rule 20 - Motion for Summary Judgment

Applicable Principles

[12] This motion for summary judgment is brought pursuant to Rule 20 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194, and, in particular, Rule 20.01(1), which provides as follows:

A plaintiff may, after the defendant has delivered a statement of defence or served a notice of motion, move with supporting affidavit material or other evidence for summary judgment on all or part of the claim in the statement of claim.

[13] Rule 20.04(2)(a), provides that if a court is satisfied that there is no genuine issue requiring a trial with respect to a claim or a defence, the court shall grant summary judgment. In Hryniak v. Mauldin, 2014 SCC 7, [2014] 1 S.C.R. 87, the Supreme Court explained, at para. 49, the circumstances that will allow for a finding that there is no genuine issue requiring trial:

There will be no genuine issue requiring a trial when the judge is able to reach a fair and just determination on the merits on a motion for summary judgment. This will be the case when the process (1) allows the judge to make the necessary findings of fact, (2) allows the judge to apply the law to the facts, and (3) is a proportionate, more expeditious and less expensive means to achieve a just result.

[14] On a motion for summary judgment, the court will first determine if there is a genuine issue requiring a trial based only on the evidence presented without turning to the fact-finding powers in sub-rules 20.04(2.1) and (2.2). This involves an analysis of the factual record. If there is sufficient evidence to fairly and justly determine the dispute, summary judgment will be granted. If the judge determines that there is a genuine issue requiring a trial, the judge may determine whether the need for a trial can be avoided by using the powers under sub-rules 20.04(2.1) and (2.2), namely: (1) weighing the evidence, (2) evaluating the credibility of a deponent, and (3) drawing any reasonable inference from the evidence.

[15] The summary judgment process must provide the judge with the evidence required to adjudicate the dispute: “There will be no genuine issue requiring a trial if the summary judgment process provides her with the evidence required to fairly and justly adjudicate the dispute and is a timely, affordable and proportionate procedure, under Rule 20.04(2)(a).”: Hryniak, at para. 66.

[16] The party seeking summary judgment is to “move with supporting affidavit material or other evidence to support its motion”: Cuthbert v. TD Canada Trust, 2010 ONSC 830, [2010] O.J. No. 630 at para. 12. A foundational element of a summary judgment motion is that each side must “put their best foot forward” with respect to the existence or non-existence of material issues to be tried: Hryniak, at paras. 57, 66; Cuthbert, at para. 12; Canada (Attorney General) v. Lameman, 2008 SCC 14, [2008] 1 S.C.R. 372, at para. 11, citing Transamerica Life Insurance Co. of Canada v. Canada Life Assurance Co. (1996), 1996 CanLII 7979 (ON SC), 28 O.R. (3d) 423 (Ont. Gen. Div.), at p. 434.

[17] A court is entitled to assume that the record on a motion for summary judgment contains all the evidence that would be presented at trial: Sweda Farms Ltd. v. Egg Farmers of Ontario, 2014 ONSC 1200, [2014] O.J. No. 851, at para. 27, aff’d 2014 ONCA 878, [2014] O.J. No. 5815, leave to appeal dismissed, [2015] S.C.C.A. No. 97. Allegations contained in the pleadings cannot be used as the evidentiary basis for positions taken in summary judgment motions. “Pleadings are not evidence”: Hawthorne v. Markham Stouffville Hospital, 2016 ONCA 10, [2016] O.J. No. 110, at para. 8.

[18] On a summary judgment motion, a motion judge may grant judgment in favour of the responding party, even in the absence of a cross-motion for such relief: Meridian Credit Union Limited v. Baig, 2016 ONCA 150, [2016] O.J. No. 947, at para. 17, citing King Lofts Toronto I Ltd. v. Emmons, 2014 ONCA 215, [2014] O.J. No. 1333, at paras. 14-15, and Kassburg v. Sun Life Assurance Co. of Canada, 2014 ONCA 922, 124 O.R. (3d) 171, at paras. 50-52. However, there must be an evidentiary record on which such judgment can be granted for either moving party or respondent.

The Burden

[19] The burden of persuading the court, through evidence, that there is no genuine issue requiring a trial rests with the moving party. This burden shifts to the responding party only after the moving party has discharged its evidentiary burden of establishing that there is no genuine issue requiring trial: Sanzone v. Schechter, 2016 ONCA 566, [2016] O.J. No. 3760, at para. 30; Connerty v. Coles, 2012 ONSC 5218, [2012] O.J. No. 4313, at para. 9.

[20] In application to the current case, Mr. Notte has the burden of establishing on a balance of probabilities that he loaned money to TELoIP that is due and is entitled to its repayment.

D. Analysis: Did Mr. Notte loan TELoIP the sum of $195,000?

[21] TELoIP was established in 2002 as an early stage developer of software-defined, wide-area networks intended to assist with the communication needs of businesses. Mr. Pat Saavedra, the founder and President of TELoIP, was Mr. Notte’s personal friend.

[22] In 2004, Mr. Notte began purchasing common stocks in TELoIP. Since that time, he claims to have invested over $150,000 in common stock and other securities of TELoIP. Mr. Notte swore that in late 2005, Mr. Saavedra asked him to provide short-term financing in the form of a $30,000 loan. Mr. Notte states that he advanced this loan and was repaid in full by TELoIP within six or seven months.

[23] There is no promissory note evidencing this 2005 loan. There is no documentation showing that the funds were advanced. Mr. Notte produced, and relies upon, a cheque stub of Agnicorp Inc., a company related to TELoIP, bearing the date of July 27, 2006 in the amount of $31,561.64, which is described by Agnicorp Inc. as “Loan + Interest”. Mr. Notte testified that this cheque stub reflects his advance of $30,000 in December 2005 and its repayment in July 2006. TELoIP has no evidence regarding the 2005 loan, at all.

[24] The lack of documentation to support the 2005 loan foreshadows the casual manner by which Mr. Notte states that he advanced loans to TELoIP. Mr. Notte swore that he knew, trusted and respected management and the board of directors, in particular Mr. Saavedra when he provided TELoIP with two loans totaling $195,000 in the period from 2007 to 2008.

The $95,000 Loan

[25] Mr. Notte produced a bank record that shows a withdrawal of $95,000 on February 23, 2007. Mr. Notte testified that he loaned this money to TELoIP further to TELoIP’s agreement to pay monthly interest on the loan at a rate of 20% per annum.

[26] There is no contract to support Mr. Notte’s testimony that he loaned $95,000 to TELoIP in February 2007. Mr. Notte swears that there was a promissory note but cannot locate a copy. There is no receipt given by TELoIP. There is no letter or memorandum provided contemporaneously that confirms that the funds were provided or the terms for their repayment.

[27] Mr. Notte produced 20 cheque stubs bearing dates covering 20 of the 22 months in the period from March 19, 2007 to December 2008 to establish monthly payments by Agnicorp Inc. or TELoIP to Mr. Notte. Each cheque is made payable to Frank Notte and is in the amount of $1,583.33, being the precise amount of the monthly interest required to be paid on a $95,000 loan accruing interest at the annual rate of 20%.

[28] TELoIP’s evidence on this motion was provided by Mr. Joseph P. Wiley, who has been a member of TELoIP’s Board of Directors since 2012 and is currently its Chairman. Mr. Wiley testified that TELoIP has no knowledge of a promissory note evidencing a loan from Mr. Notte to TELoIP in the amount of $95,000. TELoIP produced a banking deposit slip from the CIBC from 2007 showing a deposit in the sum of $95,000 but without confirming the nature of the deposit. Mr. Wiley testified that it is, to his knowledge, “inconclusive” whether Mr. Notte advanced the sum of $95,000 in 2007.

[29] Mr. Notte testified that the 20 payments received from TELoIP serviced the $95,000 loan. Mr. Wiley did not provide any evidence to explain why TELoIP made monthly payments to Mr. Notte for almost two years, calculated monthly in the precise amount necessary to pay interest of 20% on a loan of $95,000, so as to provide an alternative rationale for the systematic payments made by TELoIP to Mr. Notte.

The $100,000 Loan

[30] Mr. Notte testified that on December 13, 2008, he loaned TELoIP a further sum of $100,000, tendering into evidence a bank draft dated December 13, 2008 in the amount of $100,000 made payable to TELoIP.

[31] Mr. Notte produced 103 cheque stubs showing monthly payments by TELoIP to Mr. Notte in the 105 month period from December 2008 to September 2017. The cheques stubs were in the amount of $1,583.33 representing the monthly payment of interest at 20% on the loaned amount of $95,000, and/or $1,666.67, representing the monthly payment of interest at 20% on the loaned amount of $100,000. The cheques were made payable to Mr. Notte and referenced “FN1” or “FN2”: said to represent “Frank Notte Loan 1” and “Frank Notte Loan 2”. Over time, the interest payments on both loan amounts were combined onto a single cheque in the amount of $3,250 ($1,583.33 + $1,666.67) and the reference indicated on the cheque was “NotteI” and “NotteII”.

[32] On December 15, 2008, a promissory note was executed and provided to Mr. Notte by TELoIP, through its then-President and CTO, Mr. Saavedra. The promissory note states as follows:

For value received, the undersigned, TELoIP Inc., promise (sic) to pay to the order of Frank Notte (the “Lender”) in lawful money of Canada, One Hundred Thousand Dollars ($100,000) with interest at a rate of twenty percent (20%) per annum calculated monthly. Initial 4 months in payments are due on receipt of the $100,000 Loan ($6,667). In addition, TELoIP shall release 80,000 shares of the corporation to Frank Notte upon execution of this note. All payments of interest and principal shall be in lawful money of Canada.

[33] TELoIP executed and issued a further promissory note to Mr. Notte dated April 9, 2009 confirming the agreement of TELoIP to pay Mr. Notte the sum of $100,000 by extending the previous promissory note, and providing, in addition, the agreement of TELoIP to release to Mr. Notte 5,000 shares of the corporation. By promissory note dated September 10, 2009, TELoIP again confirmed its agreement to repay Mr. Notte the sum of $100,000 and, in addition, provided Mr. Notte with a convertible debenture in the amount of $7,000. This promissory note had a due date for repayment of December 15, 2009.

[34] Mr. Notte produced a document entitled a Promissory Note Extension Agreement dated August 27, 2010 executed by him but not by TELoIP. The Promissory Note Extension Agreement recites that Mr. Notte loaned TELoIP the sum of $195,000 and purports to establish terms for the repayment of the loaned amount of $195,000: in particular, that the loan would accrue interest at 20% per annum and would be due and payable, at the latest, on December 31, 2010.

[35] Mr. Notte testified that the Promissory Note Extension Agreement was drafted by TELoIP, on or about its date, was executed by Mr. Notte and returned to TELoIP by telefax, but Mr. Notte did not receive back a copy of the Promissory Note Extension Agreement as executed by TELoIP. TELoIP states, through Mr. Wiley, that it does not have a copy of the Promissory Note Extension Agreement as executed by TELoIP and otherwise has no evidence in relation to this document.

[36] Mr. Notte testified that the principal amount loaned, totaling $195,000, has not been repaid, in whole or in part. Mr. Notte swore, as well, that he did not receive shares in the corporation in lieu of repayment of the outstanding loan. Mr. Wiley concedes that Mr. Notte has not been repaid in cash, and is not able to establish that equity in TELoIP, or indeed any other consideration, was transferred to Mr. Notte in repayment of the Notte Loans.

[37] TELoIP’s audited Consolidated Financial Statements for 2009, 2010, 2012 and 2014 were tendered into evidence. These financial statements were audited by PriceWaterhouseCoopers LLP as prepared by TELoIP under management of its board of directors which, as of 2012, included Mr. Wiley. Each of these financial statements contains a Note that is substantively identical to paragraph 9 of the Notes to the 2014 Consolidated Financial Statement which states as follows: “Loans payable, interest at 20% per year, unsecured: $195,000. The promissory notes are payable on demand” (the “Note to TELoIP’s Audited Statement”). TELoIP has not produced audited financial statements post-2014, for reasons that were not explained on the current record.

[38] The Note to TELoIP’s Audited Statements does not name the lender to whom the $195,000 unsecured loan is payable. Mr. Wiley testified that he investigated the identity of the $195,000 unsecured loan lender with Mr. Kevin Bullock, the currently senior ranking financial officer of TELoIP. Mr. Bullock identified Mr. Notte as the lender of the $195,000 unsecured loan noted in the audited financial statements. Mr. Wiley swore to his agreement with this determination.

[39] Mr. Notte also tendered in evidence an email forwarded to him on August 3, 2015 from Mr. David Rea, at that time the Chief Financial Officer of TELoIP, with a copy to Mr. Rui Luis of TELoIP. Mr. Rea explained as follows: “Frank is one of the first investors in the business, and has continued to support TELoIP over the years - this includes patiently holding a long-term loan with us for $195K (Frank collects the interest on this monthly from us)”. Mr. Wiley rejects the characterization of Mr. Notte as a supporter of TELoIP, on his view that $195,000 is a de minimis amount of TELoIP’s overall debt, and denies that there is sufficient evidence to establish the Notte Loans. Mr. Wiley admitted that Mr. Notte has received monthly interest payments from TELoIP.

Summary – Mr. Notte Loaned TELoIP the sum of $195,000

[40] TELoIP’s audited financial statements make clear that TELoIP has an unsecured debt obligation of $195,000 and Mr. Wiley’s testimony identifies Mr. Notte as the lender. Mr. Wiley conceded in cross-examination that TELoIP is not aware of any cash having been advanced to Mr. Notte in repayment of the loans, but stated that he questioned whether TELoIP might have issued equity to Mr. Notte, in the form of shares, in repayment of the loans. Mr. Wiley testified that the records of TELoIP are inconclusive and do not allow for a clear understanding of whether re-payment has been made, in whole or in part, through share transfers. TELoIP is thereby unable to establish re-payment.

[41] TELoIP submitted that as its senior management has changed since Mr. Notte advanced the $195,000 in 2007-2008, TELoIP is concerned that there may have been additional terms associated with the advance of funds by Mr. Notte to TELoIP through Mr. Saavedra but tendered no evidence in furtherance of this concern.

[42] TELoIP had an obligation to put its “best foot forward” in responding to Mr. Notte’s motion for summary judgment: Hryniak, at paras. 57, 66. TELoIP had access to its corporate records, including its share registries, banking records, corporate books and had an opportunity to produce any evidence that could counter Mr. Notte’s evidence that the Notte Loans were advanced and remain unpaid. TELoIP did not do so. Indeed, upon Mr. Notte making demand for payment of the Notte Loans, no position was stated by TELoIP that called into question their status as unpaid. TELoIP had procedural entitlements, including through Rule 39.03, to obtain the evidence from any former officer or director of TELoIP material to the issue of the loans advanced by Mr. Notte and their repayment: including Mr. Saavedra with whom TELoIP is involved in litigation, or indeed Mr. Rae. TELoIP did not do so. As such, the court is entitled to assume that the record on this motion for summary judgment contains all the evidence that would be presented at trial: Sweda Farms Ltd., at para 27.

[43] TELoIP did not provide any alternate explanation regarding why monthly payments would be made by TELoIP to Mr. Notte in the ten year time period from March 2007 to September 2017, each month in the precise amount of the monthly interest owed on loans totaling $195,000, except to service loans totaling $195,000. The sworn testimony of Mr. Notte that these payments were in relation to the outstanding loans totaling $195,000, as evidenced by some 123 cheque stubs produced by Mr. Notte, was not effectively displaced or discredited by TELoIP. TELoIP executed a promissory note for the unsecured loan of $100,000. The Note to TELoIP’s Audited Statement is an admission by TELoIP to the readers of its audited Financial Statements of an unsecured loan obligation to Mr. Notte in the amount of $195,000.

[44] All matters considered, I conclude that there is no genuine issue requiring trial that Mr. Notte advanced loans to TELoIP in the amount of $195,000 and that these loans remain outstanding. This genuine issue can be determined on the current evidentiary record with use of the powers contained in sub-rules 20.04(2.1) and (2.2) and has been established by the plaintiff on a balance of probabilities.

E. Analysis: Does the Priorities Agreement Prevent the Rendering of Judgment for the Notte Loans?

[45] TELoIP submits that Mr. Notte expressly agreed that any unsecured amounts loaned by him to TELoIP would be subordinated and postponed to the amounts owed to the holders of secured debentures, in accordance with the terms of the Priorities Agreement. Mr. Notte denies that this agreement has this effect.

[46] TELoIP contends that in 2012 it sought to secure additional capital through the issuance of first priority secured convertible debt, engaging in multiple rounds of raising capital through the issuance of various tranches of secured convertible debentures. The process entailed that each successive tranche of secured debentures was issued on the basis that it was secured by all the assets of TELoIP and was thereby first ranking in priority as at the date of issuance.

[47] Each issuance of secured debentures involved the investors and TELoIP entering into a Priorities Agreement. TELoIP tendered evidence that Mr. Notte, TELoIP and the TELoIP investors entered into four such Priorities Agreements, for each of the four rounds of capital raising, as follows:

a) Priorities Agreement dated January 8, 2015, in which Mr. Notte is listed in the Schedule A list of investors in respect of a debenture in the amount of $1,000.00, due 3 years from the date of issue;

b) Priorities Agreement dated December 19, 2016, in which Mr. Notte is listed in the Schedule A list of investors in respect of a debenture in the amount of $387.49, due 3 years from the date of issue;

c) Priorities Agreement dated March 10, 2017, in which Mr. Notte is listed in the Schedule A list of investors in respect of a debenture in the amount of $396.90, due 3 years from the date of issue;

d) Priorities Agreement dated July 24, 2017, in which Mr. Notte is listed in the Schedule A list of investors in respect of a debenture in the amount of $575.70, due 3 years from the date of issue.

[48] TELoIP’s Amended Statement of Defence pleads and relies on only the July 24, 2017 Priorities Agreement and makes no reference to the earlier three Priorities Agreements, although the record in this motion establishes that Mr. Notte executed all four Priorities Agreements. Nonetheless, the terms of the Priorities Agreements applicable to TELoIP’s defence of Mr. Notte’s claim are substantively identical in all four Priorities Agreements.

The Priorities Agreement

[49] The Priorities Agreement does not make specific reference to the Notte Loans, a point conceded in cross-examination by Mr. Wiley. The Priorities Agreement does not expressly address unsecured loans, at all. TELoIP contends that the Priorities Agreement can be interpreted to apply to Mr. Notte’s unsecured loan and has the effect of preventing Mr. Notte from obtaining judgment in regard to the Notte Loans.

[50] The modern-day statement of contract interpretation is set out in Sattva Capital Corp v. Creston Moly Corp, 2014 SCC 53, [2014] 2 S.C.R. 633, which directs that the interpretation must be conducted “giving the words used their ordinary and grammatical meaning, consistent with the surrounding circumstances known to the parties at the time of formation of the contract” (para. 47). In its full context, the court stated as follows:

Regarding the first development [the adoption of an approach to contract interpretation which directs courts to have regard for the surrounding circumstances of the contract – often referred to as the factual matrix], the interpretation of contracts has evolved towards a practical, common-sense approach not dominated by technical rules of construction. The overriding concern is to determine “the intent of the parties and the scope of their understanding”. … To do so, a decision-maker must read the contract as a whole, giving the words used their ordinary and grammatical meaning, consistent with the surrounding circumstances known to the parties at the time of formation of the contract. Consideration of the surrounding circumstances recognizes that ascertaining contractual intention can be difficult when looking at words on their own, because words alone do not have an immutable or absolute meaning. [Citations omitted.]

[51] The common-sense approach to contract interpretation set out in Sattva builds upon the Supreme Court’s statement in Eli Lilly & Co. v. Novopharm Ltd., 1998 CanLII 791 (SCC), [1998] 2 S.C.R. 129, that contractual intention of the parties is to be ascertained by reference to the words used in the contract read in light of the surrounding circumstances, with the objective of achieving an interpretation that is a fair and sensible commercial result but without reliance on subjective intention.

[52] In Salah v. Timothy’s Coffees of the World Inc., 2010 ONCA 673, [2010] O.J. No. 4336, at para. 16, the Court of Appeal outlined the following principles of contract interpretation:

When interpreting a contract, the court aims to determine the intentions of the parties in accordance with the language used in the written document and presumes that the parties have intended what they have said. The court construes the contract as a whole, in a manner that gives meaning to all of its terms, and avoids an interpretation that would render one or more of its terms ineffective. In interpreting the contract, the court must have regard to the objective evidence of the “factual matrix” or context of the underlying negotiation of the contract, but not the subjective evidence of the intention of the parties. The court should interpret the contract so as to accord with sound commercial principles and good business sense, and avoid commercial absurdity.

[53] Applying these principles, the Priorities Agreement must be interpreted in a manner that gives meaning to all of its terms in view of the contract as a whole, that is consistent with the intention of the parties at the time of contracting, that has regard to the objective evidence of the context in which the contract was negotiated and implemented and in a fashion that accords with sound commercial principles.

[54] Mr. Notte recalled that he received the Priorities Agreement from Mr. Bullock of TELoIP by email on July 19, 2017, that he signed the execution page in the space indicated for his signature, and returned the document to Mr. Bullock. He did not receive any legal advice in relation to the Priorities Agreement, although he had an opportunity to do so. He denies that anyone brought to his attention that the Priorities Agreement was intended to apply to his unsecured loans or that he formed this view from the document. Mr. Notte understood that the Priorities Agreement properly lists his secured debentures in the amount of $575.50, $396.90 and $387.49 but gave no evidence concerning these debenture and their amounts.

[55] Mr. Wiley provided greater context for the implementation of all four Priorities Agreements. Mr. Wiley testified that the Priorities Agreements were implemented as part of the corporation’s raising of capital through the issue of secured convertible debentures whereby it was intended that the debentures would be secured against all of TELoIP’s assets and would be ranked first in priority as at the date of issuance. Mr. Wiley stated that the Priorities Agreements were concluded in the context of TELoIP needing to raise capital, often on an urgent basis, wherein the inducement offered was that the secured debentures would be paid out in advance of all others.

[56] TELoIP has not tendered any evidence of discussions or negotiations with Mr. Notte concerning the postponement or subordination of his unsecured loans by operation of the Priorities Agreement, or any of them, or even bringing this aspect of the Priorities Agreement to Mr. Notte’s attention. Mr. Notte swore that none of the Priorities Agreements were negotiated with him but rather were presented to Mr. Notte for execution, and to his understanding were referable only to his secured debentures. Mr. Notte testified that he did not, at any time, agree to prejudice, subordinate or postpone his right to be repaid his unsecured loans by TELoIP and did not understand that TELoIP had any expectation that he would do so through the use of a Priorities Agreement.

[57] The Priorities Agreement recites that the corporation sold debentures that are convertible into Series B Preference Shares in the capital of TELoIP and that in order to secure payment of the amounts owing under the debentures, TELoIP agreed to encumber the “Collateral”. The term “Collateral” is defined as follows: “Collateral” has the meaning ascribed to it in the Security Agreements.” In turn, “Security Agreements” is defined as follows:

“Security Agreements” means, the general security agreements entered into between the Corporation and any one of Investors to secure the Indebtedness, and “Security Agreement” shall mean any one of them individually;

[58] The “Investors” under the Priorities Agreements means those parties listed in the schedule to the Priorities Agreements. This includes Mr. Notte and, in the case of the Priorities Agreement of July 24, 2017, eleven other investors.

[59] The Security Agreements are in relation to “Indebtedness”, which is defined in the Priorities Agreements as follows:

“Indebtedness” means all of the indebtedness, liabilities and other obligations owed to the Investors by the Corporation under or relating to (i) the Debentures, or (ii) the other debt instruments against which or in connection with the Corporation has granted a security interest to an Investor as more particularly set for in Schedule A hereto. [Emphasis added]

[60] In the Schedule to the Priorities Agreements where Mr. Notte is listed as an “Investor”, the “Indebtedness” attributed to Mr. Notte is the amount of the secured debentures in which he participated ($575.50 + $396.90 + $387.49 = $1,359.89), but not the Notte Loans. This is consistent with the definition of “Indebtedness” that pertains to debentures and other debt instruments against which a security interest has been granted, as there is no evidence that the Notte Loans were secured.

[61] Article 5, provision 5.4 of the Priorities Agreement states that this “agreement is the entire agreement between the parties in respect of its subject matter.”

[62] Within this contractual framework and factual context, TELoIP contends that Article 2.3 of the Priorities Agreement constitutes a contractual agreement on the part of Mr. Notte not to seek enforcement of his unsecured loans until all debt is repaid to the Investors. Article 2.3 states as follows:

2.3 The Investors agree that all moneys loaned to the Corporation after the date hereof pursuant to the terms of a Debenture or, prior to the date hereof, other instrument evidencing Indebtedness, and secured by a Security Agreement, will be shared in accordance with the terms of this Agreement as though such amounts were owed and secured by the Corporation as of the date hereof. The Investors further agree that any additional amount loaned to the Corporation by the Investors shall be subordinated and postponed to Indebtedness issued or outstanding as of the date of this Agreement. [Emphasis added]

[63] Counsel for TELoIP contends that the first sentence in Article 2.3 addresses the debenture’s priority over secured debt and that the second part deals with the debenture’s priority over unsecured debt. TELoIP argues that the use of the words “additional amount loaned” should be interpreted to include any unsecured debt additional to secured debt, and thereby captures the unsecured Notte Loans.

[64] Mr. Notte submits that the words “any additional amount loaned” is indicative of a temporal issue, meaning that the intention was that any additional monies loaned after the date of the agreement would be subordinated and postponed. He denies that this term refers to unsecured debt.

[65] TELoIP relies on Article 3.1 of the Priorities Agreement as providing an additional ground on which Mr. Notte is prevented from obtaining judgment on the Notte Loans. Article 3.1 states as follows:

3.1 Each Investor agrees that it shall not enforce any of its rights under any secured debt granted to it by the Corporation, including but not limited to those rights under Section 5.02(1) or 5.02(2) of its Debenture and Section 6.01(1) of its General Security Agreement unless such enforcement has been approved by holders of Debentures representing not less than 50.1% of the outstanding principal amount of all outstanding Debentures.

[66] Mr. Notte’s response to the application of Article 3.1 is that his loans are unsecured. As such, his unsecured loans would not cause Article 3.1 to be activated as this term pertains only to the enforcement of secured debt. TELoIP has not tendered any evidence that would establish that the Notte Loans constitute secured debt, as would be required to activate Article 3.1.

Do the Priorities Agreements Prevent Mr. Notte from Obtaining Judgment on the Notte Loans?

[67] The words of the Priorities Agreement must be read in the context of the contract as a whole and in light of the surrounding circumstances known to the parties at the time of the contract. TELoIP contends, on the basis of evidence provided by Mr. Wiley and contained in the record, that the contractual intention, as discernible from the surrounding circumstances, is that all debt of TELoIP, both secured and unsecured, was to be subordinated and postponed to the secured debentures.

[68] The Priorities Agreement does not address the Notte Loans. Specifically, the amount of Mr. Notte’s unsecured loans is not listed in the agreement’s Schedule, which refers only to the amount of his debentures. Further, the Priorities Agreement does not expressly refer to unsecured debt, at all.

[69] Mr. Notte’s unsecured loans do not fall within the definition of “Indebtedness”, on any literal or grammatical interpretation, because they are neither “Debentures” nor “debt instruments against which or in connection with the Corporation has granted a security interest”.

[70] TELoIP does not contend that Mr. Notte’s loans fall within the first sentence of Article 2.3 of the Priorities Agreement, rightfully because the unsecured loans do not constitute “terms of a Debenture or, prior to the date hereof, other instrument evidencing Indebtedness, and secured by a Security Agreement…” Mr. Notte’s debentures, totaling $1,359.89, would fall within this Article, but Mr. Notte does not seek recovery of his debentures in this action. Mr. Notte’s demand for repayment of his unsecured loans is unrelated to Mr. Notte’s rights as a holder of secured debentures.

[71] TELoIP’s submission that Mr. Notte agreed to postpone and subordinate his unsecured loan based on the second sentence of Article 2.3, and particularly the phrase “any additional amount”, is not supported by a literal or grammatical interpretation of this term. The second sentence of Article 2.3 follows a sentence that pertains to money loaned to TELoIP pursuant to a Debenture or Indebtedness, and secured by a Security Agreement. The entire Article 2.3 is housed in a section that pertains to the Debentures as secured debt. To interpret the words “additional amount” to include “otherwise unidentified unsecured debt” in this context would not be fair and sensible and would not reflect the commercial context in which this provision was drafted. Rather, this second sentence of Article 2.3 has to be read as part of the Priorities Agreement as a whole, as a continuum flowing from the first sentence of Article 2.3. When read this way, the second sentence of Article 2.3 cannot have the meaning promoted by TELoIP as such a meaning would cause a departure from the remainder of Article 2.3 and, indeed, the entire Priorities Agreement.

[72] Further, Article 2.3 was prepared in a commercial context in which TELoIP denies any knowledge of Mr. Notte’s unsecured loans: a position maintained through to the time of the argument of this motion. As such, it could not have been the intention of TELoIP, at the time of contracting, that Article 2.3 was to prevent Mr. Notte from seeking recovery of unsecured loans that TELoIP claims did not exist at that time. The objective evidence of the context in which the Priorities Agreement was implemented does not allow for an interpretation that brings Mr. Notte’s unsecured loans into Article 2.3.

[73] Lastly, this second sentence of Article 2.3 is capable of an ordinary and grammatical meaning that is consistent with the surrounding circumstances known to the parties at the time of the formation of the Priorities Agreement. That is, that the rights set out in the first sentence of Article 2.3 apply equally to additional amounts of a similar nature and character loaned to the corporation after the date of the agreement.

[74] All matters considered, reading the terms of the Priorities Agreement as a whole, in accordance with sound business principles and in a manner consistent with the surrounding circumstances known to the parties at that time, I have concluded that the Priorities Agreement, and specifically Article 2.3, does not prevent Mr. Notte from seeking judgment on his unsecured loans.

Subsequent Conduct

[75] Any doubt concerning the intention of TELoIP and Mr. Notte in relation to the Priorities Agreement can be clarified by considering their subsequent conduct under the contract: 2123201 Ontario Inc. v. Israel Estate, 2016 ONCA 409, 130 O.R. (3d) 641 (Ont. C.A.). Referring to Montreal Trust Co. of Canada v. Birmingham Lodge Ltd. (1995), 1995 CanLII 438 (ON CA), 24 O.R. (3d) 97 (Ont. C.A.), at p. 108, the Court of Appeal stated, at para. 41:

The way parties act under an Agreement may be helpful in determining its intended meaning when there is doubt about the appropriate interpretation. The parties’ later conduct may show what meaning they gave to the Agreement after it was made, which in turn may show the parties’ intent when the Agreement was made

[76] In Bank of Montreal v. University of Saskatchewan (1953), 1953 CanLII 166 (SK QB), 9 W.W.R. (N.S.) 193 at p. 200 (Sask. Q.B.) the court noted that “there’s no better way of determining what the parties intended than to look at what they did under it” in its attempt to resolve an ambiguity in the agreement. The British Columbia Court of Appeal in Canadian National Railway v. Canadian Pacific Ltd. (1978), 1978 CanLII 1975 (BC CA), 95 D.L.R. (3d) 242, at p. 262 (B.C.C.A.) offered the following statement of the law on this point:

In Canada the rule with respect to subsequent conduct is that if, after considering the agreement itself, including the particular words used in their immediate context and in the context of the agreement as a whole, there remain two reasonable alternative interpretations, then certain additional evidence may be both admitted and taken to have legal relevance if that additional evidence will help to determine which of the two reasonable alternative interpretations is the correct one.

[77] The evidentiary record shows that although the Priorities Agreements were in place since January 8, 2015, TELoIP serviced the Notte Loans through to October 2017. When Mr. Notte demanded repayment of his unsecured loans, on November 23, 2017 and thereafter, TELoIP did not respond at that time by asserting the applicability of the Priorities Agreement. Mr. Roger Davis of TELoIP requested that Mr. Notte reconsider his demand, but TELoIP did not take the position at that time that Mr. Notte was prevented from recovering his unsecured loans on the basis of the Priorities Agreement.

[78] Indeed, the response to Mr. Notte by TELoIP’s special counsel in December, 2017, and TELoIP’s initial pleading position in its statement of defence, do not contain any assertion that Mr. Notte’s ability to seek repayment of his loans was prevented by operation of the Priorities Agreement.

Contra Proferentum

[79] The principle of contra proferentum instructs that in contract interpretation, ambiguous provisions are to be construed against the interest of the person who drafted or proffered them. This well-established contract interpretation principle of last resort was described by the Supreme Court of Canada in McLelland & Stewart Ltd. v. Mutual Life Assurance Co. of Canada, 1981 CanLII 53 (SCC), [1981] 2 S.C.R. 6, at p. 15 as follows:

That principle of interpretation applies to contracts and other documents on the simple theory that any ambiguity in a term of a contract must be resolved against the author if the choice is between him and the other party to the contract who did not participate in its drafting. The rule or principle, however, only comes into play if there is an ambiguity in the language of the contract.

[80] The rationale of this interpretative principle surrounds the notion that the author of the agreement, having had an opportunity to protect his or her interests, ought to be able to take advantage of such protections as have been inserted into the agreement only to the extent that they are clearly communicated in the language of the agreement to the other party: Tannahill v. Lanark Mutual Insurance Co., 2010 ONSC 3623, [2010] O.J. No. 2736, at paras. 23-24.

[81] Mr. Wiley stated in evidence that the Priorities Agreements were prepared by TELoIP or its counsel. Mr. Notte testified that there was no negotiation of the terms of the Priorities Agreement and, specifically, that no one at TELoIP stated to him, at any time that one of the purposes of the Priorities Agreement would be to postpone or subordinate his ability to seek recovery of his unsecured loans.

[82] The Priorities Agreement could have been drafted to make express reference to the postponement and subordination of unsecured loans, if this was the contractual intention. Specific to Mr. Notte, the Schedule to the Priorities Agreement that lists his debentures totaling $1,359.89 could also have listed his unsecured loans totaling $195,000, had the parties intended this result.

Summary – Effect of the Priorities Agreements

[83] All matters considered, the moving party has discharged his burden of establishing that a trial is not required to determine the genuine issue of whether the Priorities Agreement has the effect of preventing Mr. Notte from obtaining judgment for recovery of the Notte Loans. This issue can be determined on the current evidentiary record with use of the powers contained in sub-rules 20.04(2.1) and (2.2).

[84] I have determined that the Priorities Agreement does not prevent Mr. Notte from obtaining judgment for recovery of the Notte Loans. In so concluding, I make no determination regarding the priority of enforcement and recovery of Mr. Notte’s judgment relative to the secured and unsecured debt obligations of TELoIP as no such finding was sought or required by this summary judgment motion.

F. Disposition

[85] Mr. Notte is awarded judgment against TELoIP in the amount of $195,000 and accrued and unpaid interest thereon at the rate of 20% from the date of default, October 31, 2017, to the date of judgment, and post-judgment interest in accordance with the rate set out in the Courts of Justice Act.

G. Costs

[86] The parties exchanged cost outlines at the conclusion of the argument of this motion. The parties are encouraged to discuss and attempt to resolve the issue of costs.

[87] If the parties are not able to reach agreement on the issue of costs, the moving party defendant shall deliver written cost submissions of no more than five pages within twenty days of the release of this decision. The plaintiff shall deliver written submissions of a similar length within thirty days of release of this decision. I will deliver by endorsement my decision on the issue of costs.

Sanfilippo J.

Released: May 22, 2018